Home equity loan and HELOC requirements in 2022

Understanding the difference in requirements between home equity loans and HELOCs can help you determine which product is right for you.

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If you’re thinking of tapping your home’s equity soon, learn more about home equity loan and HELOC requirements, and how they might benefit you. (Shutterstock)

Home equity is the difference between your home’s value and the amount owed on your home mortgage. Your equity can change two ways — by paying down your mortgage or when your home’s value increases.

You can tap into your home’s equity to fund various expenses, such as home renovations, medical bills, and financial emergencies. 

Two popular ways to access your home’s equity are through a home equity loan or a home equity line of credit (HELOC). Each option comes with its own benefits and disadvantages. Requirements to qualify for home equity lending vary by lender, but there are some general guidelines you’ll want to follow if you’re seeking approval.

A cash-out refinance is another way to tap your home’s equity. Credible makes it easy to compare mortgage refinance rates from multiple lenders.

Requirements for tapping your home equity

For the most part, requirements for home equity loans and HELOCs are usually the same. What’s required can often depend on the lender and its underwriting standards. Here’s a look at common requirements to qualify for a home equity loan or HELOC.

Equity in your home

In many cases, lenders will only allow you to borrow as much as 80% of the equity built up in your home minus the amount you owe, but some lenders have lower or higher borrowing limits.

If you don’t have much equity built up yet, tapping into it might not make much sense. Lenders typically require you to have at least 15% to 20% equity in your home to qualify for a HELOC or home equity loan. 

Debt-to-income (DTI) ratio

Lenders also consider your debt-to-income ratio when approving loan requests. DTI ratio compares your monthly income to recurring monthly debts. The lower your DTI ratio, the less risky you look to lenders. Lenders typically look for borrowers with a DTI ratio under 43%, but often require a DTI ratio under 36%.

To calculate your debt-to-income ratio, add up your mortgage payment, outstanding loans, credit card bills, and other recurring monthly expenses. Divide that number by your monthly income and multiply it by 100 to get your DTI percentage. 

Credit score

Lender credit score requirements can vary, but you’ll typically need a FICO Score in the mid-600s to qualify for a HELOC or home equity loan. 

The higher your credit score, the more likely you are to qualify for lending and get a lower interest rate. Credit scores play a significant role in determining rates on all lending products. 

Credit history

Lenders want to reduce their risk by ensuring you’ll make your payments each month. 

To do this, lenders look at your credit history. This lets them see your history of on-time payments, current debts, and other financial obligations. Your credit score is a quick indicator of your financial and credit history, but lenders use your credit report to take a deeper dive into your past to determine if you’re a low-risk borrower. Your credit history also plays a role in the interest rate you’ll receive. 

Employment and income verification

Lenders also evaluate your income to make sure you earn enough money to cover repayment. It’s also a factor in determining how much you can borrow.

To verify your income, lenders may ask you to provide documentation, such as: 

  • Pay stubs
  • W-2s
  • Tax returns
  • Bank statements

You can compare mortgage refinance rates all in one place with Credible.

Home equity loan vs. HELOC

A home equity loan is a loan secured through equity built up in your home. Sometimes called a second mortgage, a home equity loan is distributed to you in a lump sum that you pay back in installments over a fixed term, typically between five and 30 years. Loan limits are based on the difference between the home’s current market value and the balance left on your mortgage.

A home equity line of credit is a line of credit secured through your home’s equity. HELOCs typically have a credit limit and operate like a credit card. You can use a HELOC up to your credit limit for any expenses during the HELOC’s draw period. Your lender only charges interest on the portion of your HELOC you spend during this time. Once the draw period is up, you’ll enter the repayment period, where you’ll repay the remaining balance in installments over a fixed number of years.


Benefits of a home equity loan

Home equity loans offer distinct advantages over other lending products: 

  • Fixed rates Unlike HELOCs, which typically have variable interest rates, home equity loans come with fixed interest rates. No matter what happens, your rate won’t change during repayment.
  • Predictable payments With a fixed interest rate, your payments won’t change over the life of the loan.
  • Tax benefits You can deduct the interest on your loan if you use it to make improvements to your home.
  • Lower rates Home equity loans often come with lower rates than unsecured loans because your home serves as collateral.

Benefits of a HELOC

HELOCs offer some unique benefits that make them an attractive option for homeowners:

  • Interest rate options While HELOCs generally come with a variable interest rate, some lenders allow you to convert into a fixed-rate option.
  • Only pay what you spend With a HELOC, you only have to make principal and interest payments on what you spend. You can take out a HELOC without actually using it.
  • Can use the money for anything Unlike other loans, there’s no limit to how you can spend money with a HELOC.
  • Higher borrowing limit HELOCs typically offer higher borrowing limits than credit cards or personal loans.

If you decide a cash-out refinance is a better fit for your financial goals, start by comparing mortgage refinance rates from multiple lenders with Credible.